Succession PlanningYour Business’ Will

Prepared by: Graeme Horsley

Senate Group 27 June 2014

Needs analysed: a structured portfolio

Buy & Sell Agreement

Succession Planning

• Large part of Estate Planning

• Succession Planning includes: Personal Planning

o Planning for the division of the personal estate after death

o Provision for estate administration costs and settlement of debts upon death

o Ensure that there is sufficient liquidity

o Provision for dependants and beneficiaries Business Planning

o Protection of business assets

o Continuity of businesses

o Securing the future of employees

The most vital tool in succession planning is your will

Your business also needs a will to ensure smooth continuity

Importance of a business will

• Who will take over the shares of the deceased owner ? An inexperienced heir?

A competitor?

A speculator?

• Will the dependents get a fair price for the shares? What is the impact of the death of the shareholder on the value of the

business?

How will the business be valued

Fire Sale

Is creditworthiness affected?

• Will there be sufficient funds to purchase the shares? Will the surviving owners be able to afford the shares?

Importance of a business will

• Will there be sufficient income during liquidation? How will the income of the beneficiaries be influenced by the

liquidation of the business?

Will the business be able to sustain its employees during this time?

Will the estate be delayed due to the process of finding a buyer or liquidating the business?

• WILL the surviving owners have sufficient capital to start again?

• WILL the beneficiaries be forced to sell personal assets to support the business or to supplement their income?

Business Will

• It is an agreement: Between the shareholders/members/partners of a business entity

Obliges them to sell their interest on their death/disability to the survivors and

Obliges the survivors to purchase the interest from the deceased estate

• Funding of the agreement is essential• What separates B & S from MOI and Shareholders agreements

How does it mitigate the risks?

• The Agreement provides for: An acceptable buyer

o The surviving members will purchase the deceased’s interest

o Protects their business interests

o Prevents unwanted outside influence

At an acceptable price

o Purchase price or Valuation method is predetermined

With sufficient cash

o No need to raise capital

o Funds are readily available

o Dependents have capital to invest for income

Tax Implications

• Income Tax No income tax relief on premiums paid by shareholder

The proceeds are received tax-free

• Estate Duty If structured correctly it will not add to your estate duty concerns

3 “P”

At time of death must be “Partners”

“Purpose” of the policy is to buy each other out

Sometimes the partners over insure and elect to keep the “change”

Life assured must not pay “Premiums” on his own life

Other interesting points

• What if the shareholder is the only shareholder? Can enter into a buy and sell arrangement even if all the parties are

not co-shareholders ex. An employee

May be tax implications that must provide for

• What happens if the business is terminated? Cede the policies back to the life insured

• Preferably only insure for death and disability• If you can’t make sure the agreement is adjusted

• Off the shelf agreements can cause problems

• Sometimes tired benefits are unavoidable

• Terminal illness benefits

• Partner with someone who can provide unique agreements

Other mistakes that lead to opportunities

• An unsigned agreement or no agreement

• Shareholders agreement or the MOI contradicts this agreement

• Important since the New Companies Act has been enacted

• The policies are in place but owned by the business or have beneficiary nominations

• Premiums are claimed as a tax deduction

• Client will have to resubmit tax returns

• Penalties

• Company pays premiums and not accounted for properly

• Estate Duty Implication

• Shares are over/under-valued and the policies’ values are incorrect

• How does the buyer fund the shortfalls

• Donations Tax

• What value will the executor use to calculate CGT and Estate Duty

Death of the Shareholder

Parties A B and C equal shareholders in the business

owning life assurance in proportion to the respective

shareholding

Death of the Shareholder

Party C dies /becomes disabled and exits the business

Death of the Shareholder

Party A and B become the new equal shareholders in the

business

Increase cover (now 50:50)

Any Questions???